Unsettling news

Commodity Focus // Aluminum

Unsettling news

News of a possible tariff on aluminum scrap from the U.S. into China disrupts the market.

DeAnne Toto

Photo: Adobe Stock

Tariffs have been making news in the aluminum market during the month of March, and that news has had a disruptive effect on scrap markets recently.

First, President Trump announced March 1 that he fully intended to impose tariffs on imports of steel and aluminum to the U.S. Then, the administration granted exemptions for Mexico and Canada March 8 followed by Argentina, Australia, Brazil, European Union member countries and South Korea March 22. These exemptions expire May 1, “pending discussions of satisfactory long-term alternative means to address the threatened impairment to U.S. national security,” the White House announced in a news release March 22, one day prior to the tariffs going into effect.

“By May 1, 2018, the president will decide whether to continue to exempt these countries from the tariffs, based on the status of the discussions,” the release continues.

This news was met by an announcement from the Chinese government that it intended to apply a 25 percent tariff on imports of aluminum scrap from the U.S., raising concern among aluminum scrap processors and exporters in the U.S. and introducing an aspect of uncertainty to the market, which had been showing stability as of mid-March.

In the March edition of the World Mirror: Non-Ferrous Metals, produced by the Bureau of International Recycling (BIR), Brussels, Andy Wahl of Atlanta-based TAV Holdings Inc. and vice president of the BIR’s Non-Ferrous Metals Division, writes, “The main focus is now on trade negotiations conducted by the U.S. administration and the reaction of trading partners. Lately, metal pricing has become more influenced by political and environmental actions—such as Section 232 and China’s import restrictions—than by the classic fundamentals of supply and demand.”

“In 2017, the United States exported more than $1.1 billion worth of aluminum scrap to China, which has been in a positive trade balance for more than a decade. The Chinese government’s announcement will impact this significant U.S. scrap export, spurring concern that exports of additional scrap commodities could be impacted in future announcements.” – ISRI on China’s retaliatory tariff on aluminum scrap imports from the U.S.

The export picture

In response to China’s announcement that it planned to impose a 25 percent tariff on Harmonized Tariff Code 7602.00 – Aluminum Waste and Scrap, the Institute of Scrap Recycling Industries (ISRI), Washington, issued a statement March 23 that reads: “In 2017, the United States exported more than $1.1 billion worth of aluminum scrap to China, which has been in a positive trade balance for more than a decade. The Chinese government’s announcement will impact this significant U.S. scrap export, spurring concern that exports of additional scrap commodities could be impacted in future announcements.”

ISRI notes in the release that approximately half of the 1.57 million metric tons of aluminum scrap, valued at $2.34 billion, exported from the U.S. in 2017 went to China. These 820,000 metric tons accounted for roughly half of China’s total imports of aluminum scrap for the year, the association adds.

The association says it plans to submit comments during the 30-day open comment period, providing information on the supply chain impacts of the tariff. ISRI also intends to work with the Trump administration and members of Congress to minimize the impact of the tax.

Aluminum scrap at a glance

Major End Markets:

Critical end markets are in the automotive and transportation, packaging and building products sectors.

Flow Patterns:

Most aluminum scrap stays onshore, with the Midwest and upper South being large-volume consuming regions. Of the 1.57 million metric tons of aluminum scrap exported from the U.S. in 2017, nearly 50 percent went to China.

Supply & Demand Factors: Domestic demand has been steady, though it is not keeping up with supply. Demand from China for some mixed grades has been declining.

A scrap trader based in the Southeast says, prior to China’s announcement, demand for aluminum scrap had been well-balanced between the domestic and export markets and available supply, which created price stabilization. That stability has been threatened, though processors and exporters agree that it is still too soon to know what the overall effect will be.

“Secondary smelters in China can easily substitute with off-spec aluminum ingot,” the trader says, though he adds that scrap is the more economical material and that most of the aluminum scrap entering China is in the form of zorba, a shredded nonferrous scrap mixture primarily containing aluminum.

Regarding purchases of aluminum scrap from the U.S., the trader says, “Right now, China is very picky.”

He adds that for the last year or so, some processors have been looking to relocate their facilities from China to other countries in Southeast Asia. This timing would have coincided with the introduction of the country’s National Sword initiative, which cracked down on imports of scrap materials into the country. The trader says that while his company is dealing with the same customers it had dealt with before such moves, the shipping destinations have changed from China to Southeast Asian countries and to Pakistan.

The domestic outlook

Postindustrial generation of aluminum scrap remains strong, according to sources, while domestic demand has not necessarily kept up with generation.

A processor and trader based in the Midwest says flows are “pretty normalized.” He adds that business is strong for the boating and RV manufacturers in the area and that his company is seeing a good deal of material from these sectors.

The source adds that volumes seen through his home state of Michigan’s deposit return program for used beverage cans (UBCs) is down more than 5 percent so far this year. He cited consumer trends away from soft drink consumption as one factor influencing this decline. Other factors that could be at play are the stronger economy, which reduces the incentive to recycle through the deposit-return program, and the cold weather.

“This year is outpacing some of the average declines we’ve seen in the last 10 years,” he says of UBC generation through the deposit-return program.

“We’re not panicking yet,” the source continues. “We’re getting to the point where the volumes pick up the pace.”

A scrap metal buyer for an aluminum company who is based in the West says he expects scrap generation to increase heading into the warmer months.

He adds that the automotive industry has been the “biggest game-changer” affecting generation. “They are ticking out so much material, and it has to find a home.”

Regarding his company’s demand for scrap, the buyer says it is increasing year over year in response to customer demands for recycled content. However, he adds, the product mixes the company is seeking may change based on its production.

“A lot of our traditional homes are still very much scrap based with their metal mix, and demand has been very good,” the dealer based in the Midwest says.

“Spreads are wider on the whole compared to five years ago,” he continues, attributing this to the availability of scrap in the market.

Delivery dates for most of the operations his company supplies aluminum scrap to are out about 30 days, the dealer says, though deliveries to UBC consumers tend to be out 30-days plus.

He adds that many producers are maximizing their recycling assets “to the extreme.”

“Secondary smelters in China can easily substitute with off-spec aluminum ingot.” – a trader based in the Southeast

Premium pricing

While demand remains good and material is flowing, a processor and dealer based on the West Coast says he’s unsure the market fundamentals support pricing as of mid-March. “It’s a mystery as to why the Midwest premium is going up,” he says, referencing the American Metal Market (AMM) P1020 spot premium, which was at 19-20 cents per pound as of March 20.

He expresses bearishness regarding the aluminum scrap market, adding, “But that is just me.”

However, he doesn’t appear to be the only one expressing doubt. The Midwest-based processor says the Section 232 tariff was “baked into the recent rise” of the Midwest premium. “We may see that come down as more exclusions are applied.”

That appears to be what is happening as of the end of March. In an article posted to its website March 20 titled “Hints of Midwest ali premium correction grow,” AMM writes that March 20 was the first time this year the premium failed to climb, “possibly indicating not only that the pickup tied to speculation on the final result of President Donald Trump’s aluminum import tariff has finally ceased but that a correction might be on the way.”

As of March 23, the P1020 spot premium declined to 19-19.5 cents per pound, AMM reports in the article, “Correction begins to weigh on US ali premium,” adding that this was the first decline seen since Nov. 7, 2017.

The article continues, “Since the November drop, the premium has more than doubled on the back of speculation about U.S. tariffs on aluminum imports. But the premium has backed off of its three-year high both due to a growing number of exemptions granted to countries to avoid the tariff and buyers’ appetite for scrap in lieu of primary aluminum.”

“A lot of our traditional homes are still very much scrap based with their metal mix, and demand has been very good.” – a scrap dealer based in the Midwest

Also affecting scrap transactions are the high trucking rates, which show no sign of easing, sources say.

“Not only have we not seen it easing, we’ve seen it getting worse,” the scrap dealer based in the Midwest says, adding that pricing for flatbed trucks in the region has increased 50 percent.

He is working on a bid for volume that would start later this year and says freight providers are hesitant to commit to pricing five months out. “That makes my job pretty tough,” the dealer adds.

However, he takes some comfort in knowing no scrap processors are immune to these challenges.

The buyer based in the West says he’s seen some relief in terms of truck availability if not in cost. “I don’t think that is going to go away,” he says of the high prices, adding that these rates are flowing through to affect the price of material on the street.

The dealer in the Southeast also worries about the impact a potential trade war could have on ocean shipping rates and the redistribution of shipping containers. “Logistics are the first to react to any trade war,” he says.

This is just one more area of uncertainty regarding the current market. However, recyclers should begin to have more clarity by the end of April as we learn more about China’s intentions.

The author is managing editor of Recycling Today and can be emailed at dtoto@gie.net.